The Bull Case For Prediction Markets | Ryan & David

TRANSCRIPT

David Hoffman:
[0:03] Welcome to Bankless, where today we are exploring prediction markets. There are a ton of questions going around about prediction markets. Maybe initially, what are they? But really, why are they capturing so much attention right now? Who are the big players? Where do they come from? And maybe the big question is how big are prediction markets and how big can they get? some people think that they're going to become absolutely huge. And then why are prediction markets sometimes compared to sports betting platforms and why that's a bad comparison, why prediction markets are just going to be so much larger than sports betting platforms. And lastly, are prediction markets good? Are these things good for society or are they just new ways to gamble?

David Hoffman:
[0:46] These are the topics that we're going to dive into here on the episode today. Ryan, how are you doing, my man?

Ryan Sean Adams:
[0:51] I'm good. I'm a little bit sick, but you know, this voice is going to carry through i um i do think it's time now for prediction markets episode right we've been bullish on prediction markets for a very long time i've kind of seen them grow via crypto they were one of early ethereum uh use cases with you know auger polymarket was born on ethereum it's very crypto native and it uh seems very much like a breakout application that's gone mainstream this cycle. So I want to talk to you about how much crypto is actually involved in these prediction markets as well, and how many, like the crypto values that are instantiated within them. So good time to talk about all of this, because I think they've just hit the

Ryan Sean Adams:
[1:35] next inflection point of really expanding in scope. But before we get there, David, we got an event coming up. What's happening?

David Hoffman:
[1:42] Yeah, down in DevConnect. This is for everyone who's going down to Buenos Aires for Ethereum's DevConnect. If you are one of those people, we are throwing the Bankless Summit. It's a one-day event. Think like TED Talks for Ethereum. All of your favorite speakers are going to be there. Donkrad, Ansgar, Tamash, the new co-ED of the EF. And then some other people as well. Luca from Layer 2 Beat, Shea from Flashbots, Uma Roy from Succinct. And then there's a bunch of just good talks. You're just going to sit in the seat. You're going to be entertained by some really good content, and you're going to be educated about people's different respective corners of the ecosystem. There's a link in the show notes if you want to get a ticket, the sooner you get tickets for the Bankless Summit, the cheaper that they are.

Ryan Sean Adams:
[2:24] Because they go up in price over time, just like crypto.

David Hoffman:
[2:26] Just like crypto. And the crypto only goes up.

Ryan Sean Adams:
[2:29] Only goes up. Speaking of only going up, okay, prediction markets, they have only gone up in recent years. Let's start with the definition. What are prediction markets, David?

David Hoffman:
[2:39] Yeah, I think people are becoming more and more familiar with prediction markets, especially with South Park. Made a whole episode on them, and then you had just Kyle from South Park explaining them. It's worth re-watching.

Ryan Sean Adams:
[2:49] What are you guys talking about? Prediction market app, dude. You know, online peer-to-peer betting. Yeah, social platform betting. People can make any bet they want, and then other users take them up on it. Really? Yeah, it's pretty sweet, dude. People bet on anything, even stuff here at the SKU. See? Will the girls' soccer team win on Friday? Will there be a snow day this month? Will Kyle's mom strike Gaza and destroy a Palestinian hospital? Will school lunch have tater tots next week?

David Hoffman:
[3:09] But it's just a very simple place where people place trades based on the outcome of future events. And a future event can be anything. It can be an election. It can be a sports game. It can be economic data. Any future event that's going to have a binary outcome, people can come to a marketplace and trade peer-to-peer. That peer-to-peer element is very important. That's what this makes to be a marketplace and not like a bookie model. So there are sports betting platforms that are like the house and they have a book that they just determine what the odds are. That's not how prediction markets work. Prediction markets have two people on opposing sides of the market that come together and create a price between them. And so there's just the platform that facilitates the marketplace and people will come and bet yes or no based on the odds that any given prediction market is giving them on the outcome of future event. Is that pretty clear?

Ryan Sean Adams:
[4:09] Yeah, I think so. So these are all future events, things that are happening in the future. And there's like, I guess, degrees of how... Serious these events are right so it could be something that's very serious like the outcome of a war or the outcome of an election and it can be something trivial like you know who's Taylor Swift like when's she going to get married what's her engagement these cultural issues or even like sports I guess one question for you is like to what extent is this serious not investing but informed kind of speculation versus to what extent is this purely entertainment?

David Hoffman:
[4:48] I think it fits the full spectrum of what can be. Like the outcome of the United States election is a very important deal. And that's really when poly market, one of the bigger prediction markets, the one that we're looking on the screen, really grew into mainstream society. Just volumes on the 2024 election were just blowing through the roof, just like $2 billion, like a week being traded. And then there's things like you said, like, is Taylor Swift going to get engaged this year? Does the outcome of that really matter? For the Swifties, they definitely do. For the rest of the world, eh, it's just a pop culture thing. And then you can get even more into more ridiculous markets, like, will Jerome Powell open up his speech with good afternoon? And you have a bunch of gamblers just placing bets as to whether he's going to say good afternoon or not. Does the outcome of this market materially change the world? No, strictly it does not. Is it fun? Sure.

Ryan Sean Adams:
[5:42] I remember seeing all the Brian Johnson ones, you know, the guy who's biohacking his life. Brian Johnson's average nighttime erection, two hours to 12 minutes. People are creating prediction markets on this and speculating on that.

Ryan Sean Adams:
[5:55] So it can really be anything, right?

David Hoffman:
[5:58] Yeah. So let's talk about who the big players are. Polymarket, we've identified Polymarket. The other big one is Kalshi. There are a few kind of younger upstarts as well, but between Kalshi and Polymarket, they kind of have like 98% of the total volume that is being traded. We'll start with Polymarket. That was founded in 2020. So five years old now, a little bit older than five years. From Genesis, Polymarket has always been a crypto company. They have two unique properties that make them a crypto company. One is stablecoin deposits. And so you fund your account with stablecoins. And then also the marketplace is actually on chain. So the order matching the engine for the market is on chain. It's on an Ethereum layer too. And so this has been crypto from the get-go. Crypto has tried prediction markets a number of times. Polymarket was the first instance of a crypto prediction market really taking off. And then the big moment that Polymarket really went into the mainstream was, like I said, in 2024, in the election between Donald Trump and Joe Biden. Volume had just been ramping up and up and up for months and months and months. And if you were paying attention to the news, you would start to see like, oh, people are citing prediction market odds. And it was always Polymarket in the back end. And so as the election got closer, Polymarket just got more and more into the mainstream. And then the actual day of the election was like just a huge cultural moment for people in crypto who are just like people like us who are rooting for crypto.

David Hoffman:
[7:22] The Polymarket was everywhere because the big standout fact was that Polymarket showed that Donald Trump had a 99% chance of winning the election, two hours, three hours before mainstream media was able to call the election for Donald Trump. And that was just like a big cultural moment for everyone in crypto. I was like, look, this works. This is fast. This is telling the truth sooner than the media. Mainstream media is cooked. That was like a big reaction to many people in the crypto side of things.

Ryan Sean Adams:
[7:53] Yeah, it was incredible. It's like, so if you're in the US on election night, right, and you're engaged in politics at any level, you're probably, like the way people used to do this is they're probably tuning into whatever cable news or news network they have and waiting for the news anchors to call the election in one candidate's favor or the other. And you don't know when exactly it's going to happen, but you sort of wait hours on election night for this to happen. And I remember that night just seeing like the lines diverge diverge. And Donald Trump's odds increased from like, I don't know, 60% to 70% to 80% to 90% and all the way to like the high 90%. And this is before any of the cable news, any of the anchors were comfortable calling it at all. And it felt like you were living in the future. It felt like you were able to predict something that the rest of the world just didn't really have a pulse on yet or have a beat on yet. So that was a big eye-opening moment for me. The first time I was able really to see an election result in real time, first on a prediction market instead of mainstream news. And I think a lot of people experience election night that way.

David Hoffman:
[9:12] One thing to note about how a prediction market works. We're watching this line. Ryan's looking at the line, the two lines, the red line and the blue line of Kamala Harris and Donald Trump in the 2024 election. And it's moving around. And then at the very end, Donald Trump zooms up to 100% and Kamala Harris drops down to 0%. And that's what Ryan was saying. That happened hours before mainstream media reported it. But how did the numbers be determined prior? And so at some point in time, Donald Trump had like a 60% odds and Kamala Harris had a 40% odds. This is just kind of like how an order book works, like a marketplace order book works, where some people are selling Donald Trump for 60 cents. And so what they are doing is like, if you think that 60% chance, Donald Trump is at a 60% chance of winning, you can buy for the cost of 60 cents, one share of Donald Trump winning, Donald Trump taking the yes position. And if you're right, What you're doing is you're buying a dollar in the future. It's a future dollar. You're buying it for 60 cents. And when that market clears at that price, that's how these lines get determined. And so the same thing works on the Kamala Harris side is like, well, Kamala was valued at about 40 cents at that same moment. If you thought Kamala Harris was going to win, it would cost you $0.40 to buy a future dollar if Kamala Harris won the election. And that's how this line bounces around.

Ryan Sean Adams:
[10:33] It's like in October, Donald Trump is 60%, right? If I wanted to bet in size, I could bet, say, $6,000 on Donald Trump, right? Yeah. And then once this market had settled post-election, I would receive $10,000 is what you're saying. So it's a 4K profit on that.

David Hoffman:
[10:52] Mm-hmm. Yes. And then buyers and sellers come together and they discover a clearing price as markets do. And all of a sudden we get to track the lines over time. Watching the odds fluctuate around time and events is like one of the more interesting things about prediction markets.

Ryan Sean Adams:
[11:07] Yeah. They're addictive.

David Hoffman:
[11:08] Like you can see when the debate happened and people readjusted their positions. Yeah. Stuff like that.

Ryan Sean Adams:
[11:13] Or even just Kamala Harris becoming a candidate, right? Because before it was Joe Biden. Yeah. And that suddenly Kamala Harris emerged. Yeah.

Ryan Sean Adams:
[11:22] Okay, so that's Polymarket. How about Kalshi? That's the other large prediction market right now.

David Hoffman:
[11:28] Yeah, so Kalshi founded in 2018 by Tarek and Luana. Apologies if I'm pronouncing the name wrong. So unlike Polymarket, Kalshi operates more like a fintech platform where customers kind of wire in cash with more traditional methods like bank transfers, wire transfers, Apple Pay. I think they've recently added stablecoin deposits. But also unlike Polymarket, Kalshi can legally accept United States citizens onto the platform.

David Hoffman:
[11:52] Where Polymarket is more kind of offshore, and you don't actually need to sign up with Polymarket as a user. You just log in with your Ethereum address onto the website, where Kalshi, you do need to sign up, make an account, like do the KYC information. But between the two, Kalshi accepts United States citizens and Polymarket doesn't yet. Polymarket is going to make a US platform in the future. Not yet. Kalshi's breakout moment also came in 2024, a little different though, when it won this major court battle against the CFTC, the Commodities and Futures Trading Commission, which secured it the right to list political election markets, which were previously considered to be off limits to Kalshi. So this ruling was a turning point. We're going to talk about this more later in the episode. It just legitimized event trading as a part of the United States derivatives ecosystem and opened the door just for mainstream participation. And this was a This is a very big moment in terms of just the legality and the accessibility of Kalshi and prediction markets to the United States citizens. Because of this, Kalshi was able to partner with Robinhood. And so when you open up Robinhood and you see something like a prediction market, what that actually is, is Kalshi in the back end. And so Robinhood is just whitelisting Kalshi. I would presume Robinhood is taking a cut. Yeah.

David Hoffman:
[13:13] It's just Kalshi in the back end, which I'm assuming is where Kalshi gets a lot of its volumes. Interesting lie in the Ryan, both Kalshi and Polymarket have Donald Trump Jr. As advisors because Donald Trump Jr. started making big investments post the election into the prediction markets category.

David Hoffman:
[13:30] And so there's been a lot of just like investments into this space recently. There's some other prediction markets maybe that are worth mentioning for the crypto audience, some young upstart ones as well. Limitless is a prediction market, a newer one on base. And then there's also Myriad Markets, both crypto platforms. Don't really have anywhere near the volume that Polymarket or Kalshi does. But if you're into the world of like long tail prediction markets, those are also worth mentioning.

Ryan Sean Adams:
[13:57] Because these are like, they're like exchanges, right? So these are very much games of liquidity and scale. You can well imagine there's going to be power law winners. And right now we're seeing the power law winners as Polymarket and Kalshi. I think what you mentioned, David, is important to emphasize how they grew up differently. So there was a time where Polymarket, you said earlier, is not available for U.S. Citizens right now. It's going to be in the very near future. They made an acquisition with CFTC licenses, so they're going to be able to do everything that Callshe does right now. But they've had to grow up in the gray area. So basically, originally the Polymarket website, you could make a bet they didn't geoblock U.S. Citizens. They got in trouble from the CFTC for this. They got fined. And then since that time, after paying the fine, they have had to geoblock U.S. Citizens and essentially grow up in the gray. It's almost like Tether, right? Crypto projects, Tablecoin Tether, had to grow up onshore in the gray zone. That's where polymarket was growing and so it was ironic that election night that we mentioned uh U.S. citizens weren't actually able to use Polymarket. They were able to view it in view-only mode, but they weren't actually able to participate in the Polymarket market, which was ironic given it's a U.S. election. And Kalshi wasn't active. Were they active then? I'm not sure that they were active then.

David Hoffman:
[15:26] Yes, they were. They had just gotten there. So they were playing some catch-up.

Ryan Sean Adams:
[15:30] They were playing some catch-up for Polymarket.

David Hoffman:
[15:31] But they had just gotten activated, yeah.

Ryan Sean Adams:
[15:33] Right. And then you mentioned Donald Trump Jr. becoming advisors to both these projects. This tells you the stakes that we're going to get into that are at play. This is very much a regulatory type play and a regulatory door that has been unlocked that I think is going to propel prediction markets to consume a lot more of the future of betting and the future of information, all of these things. One piece maybe to mention in case it's not clear. So this isn't just about speculation. this is also about like information that consumers are able to glean from these markets one

David Hoffman:
[16:14] Part exchange one part media.

Ryan Sean Adams:
[16:16] Yeah so what's what's the media part in case that's not clear for people right so a lot of my engagement with with polymarket is in just looking up markets for probabilities of what's going to happen in the future right so one thing i like to do is economic probabilities, you know, probability that the Fed is going to reduce rate cuts, right? We could see that right now on Polymarket and it is a far better opinion and truth signal to me than reading what a whole bunch of analysts say about it or listening to a Fed's speech. So talk about that. Is that just like a byproduct of prediction markets?

David Hoffman:
[17:00] Yeah, it's the emergent property that comes out of prediction markets that make these things just a really good tool for people who aren't even making trades on the platform. Like neither you nor I, Ryan, are like traders that much. Like we don't really trade, but we are happy users of Polymarket because of the data that it provides us. And when everyone was watching Polymarket during the 2024 election, that we were all consuming the information, using it as a media platform, not really a financial or exchange or trading platform. And like one of the ones that I've been following recently is the, because I live in New York, is the Zoran Mamdani versus Cuomo campaign. Zoran's got like an 87% chance. And now I know that. And that's useful for me to know. And it's also like one of the most traded venues on Polymarket. And it's also politics. And politics is inherently messy on social media. People are fighting. People are yelling. People are flubbing the truth.

Ryan Sean Adams:
[18:00] People are looking to persuade you,

David Hoffman:
[18:01] Right? Yeah, people are looking to persuade me. You know what's not doing any of that? The market. The market is not doing that.

Ryan Sean Adams:
[18:08] Why? It's just because they have skin in the game. It's because it's not just an opinion. It's an opinion that if you're wrong, you lose money. And if you're right, you win money. So it's a far stronger opinion signal.

David Hoffman:
[18:22] It's funny because it's all financially motivated, but the people who are making profitable trades or making trades at all, they're not ideologically motivated about Zoran Mamdani versus Andrew Cuomo. They are motivated by taking advantage of market discrepancies and arbitrage opportunities. And so it's a kind of a pure ideologically free zone for traders to make trades if they believe that there is a discrepancy in the market. And so as a result of that byproduct, because it's all finance and money and profit motive, truth emerges, which is refreshing.

Ryan Sean Adams:
[18:58] Yeah, it's refreshing. It's unique. It's kind of that thing, you know, when we were kids, like if someone said something that you didn't think was true, you'd always retort like, oh yeah you want to make a bet on it yeah

David Hoffman:
[19:08] Bet me on it yeah.

Ryan Sean Adams:
[19:09] Yeah so bet me on it if they're not willing to bet then i mean it's just an opinion the

David Hoffman:
[19:13] Opinion doesn't matter then.

Ryan Sean Adams:
[19:14] It doesn't matter right yeah so this is um pretty unique in a landscape that is just so noisy when it comes to information so difficult to discern what truth actually is and what future events uh what's going to play out in future events and now we have a much clearer signal so i guess that's the media aspect of it.

David Hoffman:
[19:35] Yeah. Yeah. I mean, one of our other sources here, mainstream media, which has its pros and cons. And I think a lot of people are fed up with the cons lately. Polling, which is inherently flawed and polling, polling can be good, but you know, there's also just flaws there. And so this is just another mechanism, another information mechanism to add to the arsenal that we have. And having another, a new strong source of signal is, like I said, it's refreshing. It's It's nice to have an alternative mechanism to talk about events and truth that is coming from a brand new source of information.

Ryan Sean Adams:
[20:10] Let's talk about how big these prediction markets are today, David. So how would you consider that?

David Hoffman:
[20:17] Yeah. Yeah. So we can measure this in a few ways. How much volume is being traded on prediction markets? How does this volume compare to like familiar alternatives? And we'll use sports betting platforms as kind of like a familiar alternative to prediction markets. Again, there's a lot of differences between sports betting platforms and prediction markets, something that we'll also go into later. And then also valuation. And so how are prediction markets currently being just valued the size of these companies? So Polymarket has an implied valuation. Kalshi has an implied valuation for their more recent raises. How do these valuations compare to familiar alternatives? So those are my three mechanisms to inform the listener how big these things are going to get or how big these things currently are. Starting with a volume traded, just as an example, I'm pretty sure that the 2024 presidential election, that is the most single-traded prediction market ever. And that came in at $3.7 billion traded hands on that one market for the entirety of that market.

Ryan Sean Adams:
[21:20] Just a big event, a lot of data on it, incredibly important, a lot of attention. It's the presidential election, happens every four years. So you saw a ton of volume on the political events-driven prediction market back in November of last year.

David Hoffman:
[21:39] That's exactly right. Yeah. And actually volumes on prediction markets haven't reclaimed the highs that they found during the 2024 election. They're approaching there because now it's football season. So now we're into football world. But still, we're still like a whole billion dollars off under the weekly volume because of how big of the presidential election was. And it's worth noting, maybe I'll hit into a future topic, but sports betting platforms don't do elections. So... So things that are popular right now, like I mentioned, the NYC mayoral election, that's $131 million, has traded hands. So pretty far off from the $3.7 billion. But this is just the current thing. This is the current thing that's happening right now.

Ryan Sean Adams:
[22:19] That's still pretty big for a mayoral election, right? Yeah. Is it just because it's...

David Hoffman:
[22:23] The New York City, the financial capital of the world, like that one kind of matters.

Ryan Sean Adams:
[22:29] Yeah. It also just seems like it has a lot of attention on it because Zoran is such a different candidate than anything we've seen before. You get the sense that prediction markets scale in terms of volume with the amount of attention that media gives to these events as well.

David Hoffman:
[22:47] Yeah, I would definitely agree with that. There's a very strong correlation between attention and volume. Another one, the World Series, baseball World Series, it's baseball postseason right now. So we got $69 million being traded on the World Series champion in 2025. So that's the big sports one. But also, like you said, there's the Federal Reserve. Are there going to be rate cuts in between now and the end of the year? Like that's another very popular one. So right now, if you add Kalshi and Polymarket together, the two biggest ones, which basically represent 98% of all volume, We're coming in right now at $1.5 billion of weekly money trading. And A, that's going up very rapidly. It's going up 5% week over week, something like 10 or 20% month over month. So check back in in a month and maybe we're at new highs. If we compare them to sports betting platforms, things like FanDuel and DraftKings, both of them are doing about respectively $1.5 billion in volume per week. And so if we add all the two major prediction markets together, they're doing $1.2 billion together. And then the two biggest sports betting platforms are doing $1.5 billion each. So we're like halfway there to like at parity with this sports betting platform, which to me seems like it could be much higher. It ought to be much higher in the future.

Ryan Sean Adams:
[24:13] Why?

David Hoffman:
[24:14] Why? One, because sports betting platforms are for sports and prediction markets are for everything. There's no constraint as to what a future prediction market could be about. Like I said, the election, political elections, I expect to be the larger of the two markets between sports and politics. Granted, sports happen more frequently. There are more sports. There's always a sport happening somewhere. So maybe there's like more markets, but they're individually smaller. And then with elections, they're larger, but fewer of them. But we still haven't claimed all-time highs in terms of volume on politics. And that's just politics. Geopolitics, pop culture. One that didn't really have that much volume in it, but definitely got a lot of attention on it is this like bet around Taylor Swift's engagement. And this one person made a like a ten thousand dollar bet that taylor swift is going to get engaged and they did it like hours before she got engaged so like somebody knew insider right insider totally insider yeah is this insider trading i don't know if insider trading applies to prediction markets i don't know that a lot of.

Ryan Sean Adams:
[25:17] Great a lot of gray areas legally in this whole space

David Hoffman:
[25:19] Yeah so they made they paid place a ten thousand dollar bet and they won fifty thousand dollars, The media blew up about this. The media gave this so much attention. And I think like as this becomes more mainstream, this is a, I don't know this, but this is a prediction that I'm making. As prediction markets become more mainstream, there will be more and more money on like pop culture bullshit. Just like stupid stuff like this. Like that doesn't really matter. Like not to say, again, no disrespect to the Swifties, but like the consequences of this outcome just doesn't really matter. But it's fun to bet on. And I expect that volume, that side of prediction markets to grow pretty shortly here.

Ryan Sean Adams:
[26:00] That's the thing. They're fun, they're entertaining, and they get media attention. I want to go back to these volumes, David, because I think a lot of people thought

Ryan Sean Adams:
[26:08] after the 2024 election that, okay, that's it. Now we're going to see volumes on prediction markets collapse.

David Hoffman:
[26:15] Go to zero.

Ryan Sean Adams:
[26:16] Yeah. It's just every four years, we'll see the spike. Basically, that they're only good for political events, right? And everything else is kind of minor. But the second wind in all of this volume, a lot of that has been driven not just by political things because that's been smaller. Everything has been smaller than presidential election, but really by sports betting. And maybe we should talk about that for a little bit, right?

Ryan Sean Adams:
[26:41] So sports betting today, it's really taken the world by storm over the last five to ten years. And there are platforms like DraftKings and FanDuel. Um i don't know what the value of these platforms actually is but they have been doing the sports betting they've been scratching that entertainment sports betting events driven outcome itch but they've been doing it in a different way how is a fan duel or a draft king different than what we're seeing with kalshi and and polymarket

David Hoffman:
[27:15] So before I answer that question, Ryan, let me just give you the numbers of these two very large sports betting platforms, what they are worth, because I'm going to make some arguments about how these platforms are flawed compared to prediction markets. And so if they are worth this much and they're flawed, does that mean that prediction markets ought to be worth even more if they attract more volume in the future? So Flutter Entertainment, which is known as FanDuel, that's the company that owns FanDuel, $42 billion is the market cap of Flutter Entertainment, which is FanDuel. Notably, I will tell you that it is also down 20% in the last month.

David Hoffman:
[27:51] And then there's DraftKings, $16 billion, down 30% in the last month. Now, I'm not going to tell you exactly why markets do what they do, but I think 20%, 30% down in the last month when Polymarket and Kalshi are making all-time highs in volume and attention and people are starting to look under the hood and realize that the sports book model is fundamentally flawed compared to the peer-to-peer trading model. I think that that's why that they are down so much. But nonetheless, $42 billion after being down 20%. So these things are valued something like five, six, seven times what our respective prediction markets are being valued at. And so that's the context there. Why are prediction markets better than sports betting platforms? And so just using sports betting platforms as a just, we're using them as a glimpse into the future size of what prediction markets can be because we know sports betting platforms are this narrow and inferior market. They only do sports and they're not a marketplace. They are a betting platform and we're gonna explain the difference.

David Hoffman:
[29:00] The big one is that prediction markets are peer-to-peer and sports betting markets are this house book system. House kind of like the casino is the house or like they operate a book, right? So they, sports betting platforms, just they dictate what the numbers are. Here are the odds for the Seattle Mariners to win the World Series. We tell you what the odds are. How do they come up with those odds? Well, they have experts and they have experts just come up with what the odds are. And then they give themselves a little bit of paddings because they need to be profitable and they need to make sure that they have a take rate. So that's their business. This is... How they've grown, it just is what this is. And this is why sports betting platforms are regulated similarly to how casinos are regulated. They are regulated as like gaming and not like video gaming, but gaming in the financial sense. It's like these are games that people are putting money on.

Ryan Sean Adams:
[29:55] In the casino sense, right? In the lottery sense.

David Hoffman:
[29:57] Yes, yes. Downstream of this, there are two sub-conversations. Because sports betting platforms are betting, inherently betting against their users. Users are not betting against other users. Users are betting against the platform. This classic principal agent problem emerges where the platform itself just becomes adversarial to its users.

Ryan Sean Adams:
[30:21] Right. Because if the users get good at sports betting, then the platform loses money. So ideally you want people that are rich and dumb, like rich and not very good at the game and will keep playing even though they keep losing money.

David Hoffman:
[30:34] They're there for the entertainment. They're not there for making money. Right, right. Which is eventually you run out of money.

Ryan Sean Adams:
[30:40] Okay, yeah. So this is a problem, right? This is like the casino who tries to entrap an addicted gambler in their casino.

David Hoffman:
[30:51] That's why they give you free drinks.

Ryan Sean Adams:
[30:52] Right, give you free drinks. The casino that looks for people that are playing the odds, card counting, doing something where they're winning disproportionately and tries to eject them from the casino. It's the same principle at play here.

David Hoffman:
[31:06] Totally. And then the other half of this conversation is that because prediction markets are free markets, the amount of total capital that becomes interested in participating in these free and fair markets is going to be much larger than a house book model. So that's the other point. Let's go into the systemic unfairness. There's this really great article from Twitter, from Dahmer that I read. I want to read out a couple of sections from.

David Hoffman:
[31:28] He wrote, traditional sportsbooks systemically restrict or ban customers who win too often, revealing the core dysfunction of the model. The practice has grown so widespread that the Massachusetts Gaming Commission launched a formal investigation, holding hearings through 2024 and 2025. Regulators found that winning bettors were routinely limited, while losing bettors had their limits raised, creating a perverse two-tier system where success is punished and failure is rewarded. Data from the commission shows that 0.64% of bettors in that state, thousands of individuals, had been restricted, most to just 1-24% of the normal maximum bid. So they're neutered down to 1-24% of the maximum possible bid. Further analysis confirmed that sharper, more successful bettors faced the strictest limits, while VIPs and consistent losers received preferential treatment. The result is a market designed not for fairness or merit, but for extracting profit by selectively excluding skill. Now, while this might be increasing the margins of a sports betting platform.

David Hoffman:
[32:37] The argument here is that the TAM, the total addressable market, is completely cut off. So you are just servicing gamblers. It's just gamblers that you are servicing. You are not servicing sophisticated people who are making informed decisions who treat this like a job or who are sharp. And so the sophistication just leaves the market.

Ryan Sean Adams:
[33:00] Yeah. Like here's a difference, right? So with a prediction market like Polymarket or Kulshi, quantitative hedge funds could use the tools that they have developed for public markets, you know, consuming all this data, machine learning, AI decision making, quantitative stuff, and come out with event-based predictions for sports betting. They couldn't participate in book-type FanDuel's or DraftKings marketplaces. Those books wouldn't want them there anyway, but they can now participate and use the same tools that they have in these types of prediction because it's just, it's completely fair. It's completely meritocratic and he who has the best data or predicts the outcomes most accurately wins the money. And so of course, all of that capital will start to participate.

David Hoffman:
[33:58] Totally. And this is why the peer-to-peer marketplace is just fundamentally more aligned with the users of the platform than a house order book model that DraftKings or FanDuel represents. Because when two people trade against each other on Polymarket, that's the whole competition. It's a free market, free competition. And all Polymarket does is they take a very small fee as a cut. And so they take, I don't know what they take, like 0.1%, 0.2%. And so because it just takes a small fee, a volume-based fee, which is the same business model, Ryan, as the NASDAQ or the New York Stock Exchange. Or Coinbase. Or Coinbase. What happens as a result of that is people with sophistication and a lot of money can trust that marketplace. Because imagine if FanDuel was like, oh, this person with $10 billion, let me just reduce their limits. What? Why would you do that? And then increase the take rate. Some things just don't fundamentally line up with creating a very large marketplace to be worth even more in the future. So, Flutter and FanDuel, that's the... 42...

Ryan Sean Adams:
[35:05] Market cap.

David Hoffman:
[35:06] Is the market cap of FanDuel. Notably, I will tell 20% in the last... And then there's DraftKings. Down 30%. I'm not going to tell you exactly, but I think last month, when Pogging, all-time highs in Vaughn, and people are starting to realize that the model is fundamentally year-to-peer trading. I think that that's why. But nonetheless, 42 billion, 20%. So, these things... Six, seven time respective prediction markets. That's the context there.

David Hoffman:
[35:33] Why are prediction markets better? And so just using sports, we're using them as a...

David Hoffman:
[35:55] Yeah. Yeah. Yeah. Yeah, so Kaltchie took the CFTC to court to ask some very big questions about the nature of prediction markets. Do these event contracts, which is what a prediction market is, count as derivatives under CFTC authority or gambling or regulated betting under state gaming laws. Does the CFTC have the illegal authority to reject or block certain event markets, such as electric markets, on the basis of them being gaming or a threat to public interest? This is what Kalashie challenged the CFTC on. They won. In October 2024, they won. When a federal appeals court.

Ryan Sean Adams:
[36:48] The DC center, allowed Kalashie to revive and

David Hoffman:
[36:51] Offer election-related subcontractions. Downs contracts that have been blocked by the CFTC are betting against their users are not betting against that that has happened the platform in october 2024 emerges what happened in november 2024 because.

Ryan Sean Adams:
[37:03] Because if the users get good at sports betting then the platform loses money so ideally you want people that

David Hoffman:
[37:10] Are rich well not really that but the election happened like rich and not very good at the game one month before the election we can finally do the election markets and so that's why i said earlier that they were like kind of playing from behind with polymarket who is operating on the in the offshore model the the crypto models like They exist on the internet.

Ryan Sean Adams:
[37:25] I mean, interesting story too, right? In that same month, October, Shane Copeland, the founder of Polymarket, got his apartment raided by the FBI.

David Hoffman:
[37:35] Was that in November? I think that was in November.

Ryan Sean Adams:
[37:37] Yeah, October, November.

David Hoffman:
[37:39] It was right after the election.

Ryan Sean Adams:
[37:40] Oh, was it? Okay. So in that same time window, right? And implication that there's some nefarious activity going on, you know, that's a whole story in and of itself. But it seems like there are a lot of people in government that don't like the idea of these prediction markets going mainstream.

David Hoffman:
[37:58] Yeah. So let's do a little bit of comparing and contrasting between sportsbooks and prediction markets. So if you're a sportsbook, you are regulated as a gambling operation. This is games of chance, which is what prediction markets are inherently not. So if you are on a prediction market, it's not a game of chance. There's not a chance here. you have knowledge or edge or information about a future outcome or you don't. And so that makes them financial exchanges or derivatives or information markets. And so that puts them under the purview of the CFTC. Like Ryan said, the CFTC is federal as opposed to state gaming commissions. So if you're a sports betting platform, you have to go state by state by state and get a license after license after license. You also have to pay a lot of taxes. You have to pay state taxes as well. You don't have to pay state taxes as a federally regulated derivatives exchange. And so it's just one regulatory authority versus 50 to be operational in 50 states. And most importantly, as a prediction market, you can spin up new prediction markets like 2024 election, 2026 election, like midterms, anything, without having to ask for permission.

David Hoffman:
[39:07] And so once you have this like regulatory approval, you can just list anything. You can make a market about anything. And so in terms of just like operational expenses, the operational expenses of Kalshi and Polymarket, they're much lower because they have this one single regulator. And really the big difference here is that traditional sport books are built for where gambling is a vice. And so they are siloed, taxed, and restricted versus prediction markets are a marketplace, an asset, something that fits inside of Wall Street, not inside of Las Vegas.

David Hoffman:
[39:38] And so there's just like an asymmetric scalability conversation here. Sportsbook scale linearly, like state by state. Prediction markets can just scale exponentially because as soon as they have regulatory approval, which they do, they can access the whole entire globe and the whole entire spectrum of possible markets.

Ryan Sean Adams:
[39:55] I mean, when you put this together and now you have this massive regulatory opening that happened for election markets, right, for Kulshii, and then happened for sports betting markets, for Kulshi, and also Polymarket. I mean, is there any reason that prediction markets don't just absolutely eat the sports, you know, books, lunch? I mean, they've got to at this point, right? They'll have the liquidity. They'll have the access. They'll have the size with respect to markets. They won't be predatory to their customers. They're just going to absolutely dominate, right? It's probably what the market was pricing in with FanDuel and DraftKings being down like 10 to 15% on the year.

David Hoffman:
[40:37] I think that's exactly right. And like, I want to use sports betting platforms just as a way to anchor us to the future size of prediction markets. Prediction markets are a much better sports betting platform than sports betting platforms are. But they are not sports betting platforms. They are global markets about anything in the future. And so if sports betting platforms are valued between $16 and $42 billion, respectively, and that's just sports. And say sports is pretty big, but say it's like the fourth biggest category that people can bet on. You also have politics. You also have geopolitics. You also have, finance-related topics, financial earnings reports, will the Fed lower raised interest rates? You have, will Taylor Swift get pregnant? Pop culture stuff that the Zoomers want to bet on.

David Hoffman:
[41:28] You have, and so sports are just going to get absolutely eaten by prediction markets, but there's five, six, seven other categories that are just as valuable as sports that haven't even been built yet because there's no respective pop culture speculation platform, which is what prediction markets can be. So when I like just look at the amount of volume that prediction markets can attract, I think it'll be an order of magnitude larger than what the house book model can attract. But also you get seven times as many markets, eight times as many markets. And so that's why I think like start with like the $42 billion of like FanDuel and 10X that, 100x that like something much more massive than what sports betting platforms are currently.

Ryan Sean Adams:
[42:17] Yeah so i guess if fanduel and draft king are 60 billion dollars in valuation right what you're saying is that's just sports betting and that's like the absolute minimum floor for the value of prediction markets plus you have to add an order of magnitude now it's professional now it's global now it's super deep liquidity so just sports betting alone you could get to a number like $100 billion, right? Then after that, it's all of the other markets. You could easily see prediction markets being $500 billion in market size, maybe even larger as all of these events get added to the space.

David Hoffman:
[42:54] Yeah. I mean, Coinbase, Robinhood are clocking in at like $120 to $180 billion respectively. And I also don't think that they're done growing. And I think prediction markets are five years behind them, three years behind them in terms of size for what they can be. But that's like a more appropriate comp than a sports betting model. Here's another anecdote that I think is worth considering. Like a hedge fund or a very well-capitalized institution, they were able to kind of generate the value of a prediction market just via one-off financial contracts, they could go to Wall Street, some other bank or some financial institution on Wall Street. And if they want to hedge a real world event, they were able to do that via these one-off proprietary contracts. So the mechanisms to hedge against real world events have always existed, but they've been private and siloed and very privileged, a very privileged tool for the super wealthy. With prediction markets, that same behavior that has always existed can now open up to the long tail of the world, the rest of the world, simply because prediction markets are just very generalizable and very scalable. And the cool thing here is that these prediction markets, they are at the intersection of importance and fun. This is going back to that Domer article that I'll link in the show notes.

David Hoffman:
[44:13] So he says, and I'll actually just read the quote here. Polymarket is at the nexus of importance and fun. For instance, betting with a sports book when you get off work is fun, but not very important. And pricing bond default risk via a request for quote system at your trading desk may be important, but it's not many ideas people are fun. Polymarket is both a consumer product for someone who is just making a bet on something not super serious. Is Trump going to say the word illegal alien in his speech? And it's a professional product for very high level traders trying to predict something that is more complex. Like what is the Federal Reserve going to do six months from now? You can have a portfolio of $10.79 and be betting on cricket matches. You could also have a portfolio of $25 million and be market making the next world leaders in various countries. And so he's just saying like, yo, there's no bias here. Like whether you're a small individual who wants to make small bets, or if you are a massive hedge fund trying to hedge against the world's biggest tectonic shifts on geopolitics, Just use a prediction market and come to the same place.

Ryan Sean Adams:
[45:15] This all seems part of the trend of like making markets out of everything. And it's interesting how different societies adapt to this because there does still seem to be a lot of hangups about this at like a societal level. Like certain markets, I think both you and I agree should be illegal, right? But we probably have a wider aperture of that than say someone like Elizabeth Warren, who probably thinks that election markets should be illegal. Why? Because they could be susceptible to some sort of bribery. I personally think that assassination markets should be illegal, for example.

David Hoffman:
[45:54] What's an assassination market?

Ryan Sean Adams:
[45:56] An assassination market would be some sort of will X person, I don't even want to name a name here, will some political figure, celebrity, et cetera, die by date X, right? And then somebody could fund that market, provide liquidity for that market, and almost incent that outcome for someone else. So somebody could bet yes, and then the assassin could take it in their hands.

David Hoffman:
[46:22] No, no, no. Somebody would bet no. I put a million dollars that no, this person will not be assassinated by the end of this year.

Ryan Sean Adams:
[46:29] Yeah, yeah, right. That would be the bounty. And then the assassin would bet yes and actually win the outcome and win that money, right? And so you've created an assassination marketplace. And this has all been theoretical. We don't actually see these in practice. Polymarket and Kalshi are obviously not allowing that type of behavior. But that's just an example of a market that I think most people would be like, no, we don't want that in society.

David Hoffman:
[46:53] That doesn't benefit anyone in society. Right.

Ryan Sean Adams:
[46:55] I guess what I'm just saying is it seems like part of the big story of why prediction markets, why now, is kind of a regulatory story. In the US anyway, it's the CFTC has lost some court cases and they've softened up on it. And they're like, okay, markets for everything. I guess we're doing that now. And so now we're getting markets for more things and they're global and they're liquid. And it seems like crypto is enabling force for that. It's like you don't have to have cryptocurrency to create these prediction markets. You get things like stable coins and global liquidity and on-chain marketplaces makes these things much more composable and far-spreading and distributed. So how is, I guess, crypto wrapped up in this story? And then what's your take

Ryan Sean Adams:
[47:42] on how good these things are for society? And do we want prediction markets? Is this a good outcome?

David Hoffman:
[47:49] Yeah. How is crypto wrapped up in this story? Maybe we can start there. We've talked about Polymarket being kind of the crypto project. It's worth noting that Polymarket is non-custodial. And we've said it's kind of this offshore in this gray area. But it's not a place where you deposit your money into. You don't deposit your money into Polymarket. Polymarket is just kind of like the logic and their front end. It's very much not like Coinbase or Binance where you are depositing your money and you're entrusting that to the centralized server. You're entrusting that to Brian Armstrong.

Ryan Sean Adams:
[48:22] It's more like Uniswap.

David Hoffman:
[48:23] It's more like Uniswap. It's not totally decentralized, but it's non-custodial, very much unlike FTX, for example, and Sam Bankman-Fried, which was totally custodial. And so the benefits that Polymarket gets from being in this crypto world is that it is globally accessible. There's no sign-up for Polymarket. You just deposit money. And you don't have to tell them your name. You don't have to tell them who you are. You are just a free market participant sitting shoulder to shoulder with anyone else with internet access all over the world. And so the global nature of these prediction markets and the accessibility of these prediction markets is what makes them so powerful. It's like anyone can go and drop an opinion by buying one side of the market. And I think that's pretty cool. The reason why having this global accessibility to these markets becomes such a good thing is because prediction markets are the integration of speech and markets.

David Hoffman:
[49:19] The reason why the freedom of speech is so sacred is because that's how we get to the truth of things. Being uncensored and free in your ability to express an opinion is how society just comes to know truth. And your good ideas are placed into the free market of ideas, and they are accepted or discarded based on their merits. And the same thing is happening with prediction markets where your financial opinions as to whether the future of something will happen is on the free marketplace. And so like we've said how prediction markets are a new form of media, it's the same thing. It's a freedom of speech. But now it's the integration of speech and markets to allow for opinions about the likelihood of future events to emerge. There's this like dystopian trope about like the ministry of truth. It's like first used in like 1984. And that whole idea is just illustrative of how valuable it is for autocratic regimes to determine what is truth from fiction. And so it's not actual truth that is the truth. It's whatever the autocrat says is true, is what is actually true. And it's also why in the United States, we don't want governments to be infringing upon our freedom of speech. Governments should not be involved in media and journalism. And why freedom of speech is such a core part of free society is.

David Hoffman:
[50:38] The truth can often be inconvenient to the powers that be. Authoritarian regimes or parties currently in power have a vested interest in controlling narratives and controlling truth. And prediction markets offer mechanisms to emerge via the free and fair market. That's what makes them so powerful. And that's why I kind of think as users of prediction markets, we should hold our prediction markets to some level of accountability as platforms for individuals to find freedom of speech and freedom of expression. These things are starting out as speculation platforms on future events, but I think they also look something like Facebook or Twitter or Instagram, where they are platforms for expression as well. They are media platforms. They are content platforms. There's going to be a ton of content that is produced about prediction market platforms because of what they represent, because of the truth that they have to say.

David Hoffman:
[51:39] And I think that is a very powerful tool and why it's good for humanity. These are, again, free speech platforms, not for any one particular person, unlike Instagram, unlike Twitter, unlike Substack, but it's collective speech. It's collective opinions about the truth of things. And so these are tools for the individual and societies to be able to speak truth that doesn't get filtered through a mainstream media, which can often be an extension of the government or through what the government says is true. And so it's an alternative way for truth to come out. And that's why they enable individuals and societies against the powers that be. And so that's why these things, in my mind, are good, capital G, good, because they are truth platforms and they just leverage the market to

David Hoffman:
[52:24] get truth out. And I think that's pretty cool.

Ryan Sean Adams:
[52:27] I agree with all that. Now, maybe as we wrap this up, David, we've got a clip from Tom Lee. I think you recently talked to him about prediction markets on an episode. Shall we listen to that?

David Hoffman:
[52:37] Yeah, let's hear what Tom Lee has to say about production markets.

Ryan Sean Adams:
[52:40] I think financial entertainment... Might even understate really how important everything these prediction markets are doing. I mean, to me, the 2024 election and Trump-Polly market and the role Polly market played in calling that election tells me that it's not just for entertainment. It's really serious wisdom of the crowd knowledge that's coming into play. As long as these betting markets don't influence by itself, by reflexivity, the outcome. But to me, I think that that's, as we move to tokenized equities and real world assets, and when you overlay that with prediction markets, that's really the alchemy that's going to cause the financial system to actually be a lot more liquid and for capital to be raised more easily.

David Hoffman:
[53:30] He said something there, Ryan, that I think is going to be the topic of a future episode of when the outcome of a prediction market actually impacts the relevant event. And that is called futarchy. We do not have time to talk about that.

Ryan Sean Adams:
[53:46] Using prediction markets for governance and determining the future. Yeah, pretty fascinating. Okay, and as we wrap this up, one other thing that dovetails, you know, Tom Lee is a product of TradFi, right? Of course, he's very familiar on Wall Street. TradFi is definitely doubling down on prediction markets. So Polymarket, it was announced this week, just raised $2 billion. That's $2 billion in capital from ICE. ICE, of course, they're a large exchange. They're the owners of the New York Stock Exchange, okay? And this is at a $9 billion valuation. Something that Joe Weisenthal said from Bloomberg, it seems like every company in the trading world is melding into some prediction market slash sports betting slash crypto conglomerate. All the lines between speculation and hedging or gambling and investing are going away. And I think that's a good take. It's all kind of combining, all coming together. Everything's becoming almost an information market, right? whether it's investing, speculating, gambling, to the extent that it requires some information or some skill, that's all going to be rolled inside of these prediction markets.

David Hoffman:
[54:54] All right, Bankless Nation, that's why we think prediction markets are gonna 100X from here and why you should be paying attention. And if you are new to this channel, we appreciate you stopping by, like and subscribe so you can get more prediction market content your way, as well as everything else that is going on in the crazy wild west of crypto. That being said, none of this has been financial advice. You can lose what you put in, but nonetheless, we are headed west. It's not for everyone, but we are glad you are with us on the Bankless Journey. Thanks a lot.